United States Mexico Canada Agreement (USMCA): Meet the new NAFTA

October 5, 2018 Marija Majdoub

 

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It took 13 months of negotiations, but Canada and the United States announced Sunday night that the two countries, along with Mexico, had finally agreed to a trade deal to replace the North American Free Trade Agreement (NAFTA).

Meet the USMCA, the United States Mexico Canada Agreement.

The agreement is widely regarded as a good deal – one that will provide stability to the entire continent, following months of brinkmanship and the threat of an all-out trade war. However, it has been loudly criticized in Canada by some lobby groups, most notably, farmers.

Highlights from the USMCA

  • Cars – To encourage local production, the USMCA raises the minimum regional content requirement to 75%, up from 62.5%. This means that more of a vehicle's parts need to originate from North America to be exempt from duties. Canada has also negotiated a generous quota for tariff-free exports on cars and parts to the U.S.
  • Drugs – Under the new agreement, biologic drug makers will see their products protected from generic competition for 10 years.
  • Dairy – Canada will loosen the lid and allow American farmers greater access to Canadian consumers, which includes tariff-free access to 3.6% of Canada's dairy market.
  • Steel ​–​ U.S. 25% and 10% tariffs on steel and aluminum remain as do retaliatory tariffs set by Canada. All parties are committed to find a better solution. 
  • Copyright – Intellectual property copyright protection has been extended to 70 years (from 50 years) beyond the author's death under the new agreement. 
  • Online shopping – Consumers will be able to order up to US$150 worth of goods from U.S. retailers without paying duties. The current threshold is currently set at US$20. Additionally, orders under US$40 can also be made without paying provincial sales taxes or GST.
  • Dispute resolution – The USMCA allows nations to block imports if it believes the country sending goods is not trading fairly. This action can be challenged via independent arbitration. 
  • Sunset clause – The new USMCA expires in 16 years. In 6 years the 3 countries will meet to review the deal and decide if it should be extended beyond that term.
  • Chinese sunset clause –​ USMCA partners can review trade deals between other USMCA members and other non-USMCA countries in advance. This clause also allows for the reviewing USMCA members to provide 6 months’ notice that they plan to leave the USMCA.

Source: The USMCA explained: Winners and losers, what's in and what's out. Macleans, October 1, 2018.

Finding compromise and easing tensions

During negotiations Canada compromised on dairy and the U.S. compromised on the dispute resolution process but overall, negotiators came to develop a deal that is good and fair for the countries involved. Beyond these changes and beyond the headlines, the USMCA, looks a lot like NAFTA. Although agriculture in Canada may be impacted slightly, it will not have a major impact on markets or the economy.

Providing a bit more clarity 

Going forward, we expect the Bank of Canada will resume raising interest rates later this month and possibly again in January, to keep inflation in check now that North American trade tension uncertainty would appear to be behind us (markets expect three hikes to occur over the next 12 months). The Canadian dollar rose in response to the trade deal announcement, and we expect it to remain modestly elevated as higher interest rates will make it more attractive for people to hold Canadian dollars.

Business as usual 

As discussed in one of our earlier posts, we expect equities to continue to do well in the coming months. At this time, we continue to maintain our tactical, lower-than-benchmark allocation to Canadian equities, mostly because we expect better performance in the U.S. and abroad. Earnings have been strong globally, in the U.S. in particular, a trend that is likely to continue.

As part of our ongoing investment process, we will continue to monitor trade relations (particularly between China and the U.S.) and analyze any potential impact to global markets and our investment strategy. 

If you have any questions about how your portfolio is positioned, please contact your MD Advisor.

About the Author

Marija Majdoub

Marija Majdoub, CMA, CFA, is Vice President with the Investment Strategy team at MD Financial Management. She leads the team of portfolio managers and investment professionals responsible for managing the firm’s mutual funds and investment pools, and developing MD’s investment views.

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